PRODUCTION ANALYSIS

UNIT-3

BBA 107 05/21/2024

 OUTLINE

 Fixed Vs Variable Inputs

 Production Analysis
 Total Vs Marginal Product
 Law of Diminishing Marginal Returns

BBA 107 05/21/2024

FIXED VS. VARIABLE INPUTS
 Fixed inputs -resources used at a constant
amount in the production of a commodity.
 Variable inputs - resources that can
change in quantity depending on the level
of output being produced.
 The longer planning the period, the
distinction between fixed and variable
inputs disappears, i.e., all inputs are
variable in the long run.

BBA 107 05/21/2024

 PRODUCTION ANALYSIS WITH ONE
VARIABLE INPUT
 Total product (Q) refers to the total amount
of output produced in physical units (may
refer to, kilograms of sugar, sacks of rice
produced, etc)
 The marginal product (MP) refers to the rate
of change in output as an input is changed by
one unit, holding all other inputs constant.
TPL
MPL 
L

BBA 107 05/21/2024

TOTAL VS. MARGINAL PRODUCT
 Total Product (TPx) = total amount of output
produced at different levels of inputs
 Marginal Product (MPx) = rate of change in
output as input X is increased by one unit,
ceteris paribus.
TPX
MPX 
X

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 PRODUCTION FUNCTION OF A
RICE FARMER
Units of L Total Product Marginal Product
(QL or TPL) (MPL)
0 0 -
1 2 2
2 6 4
3 12 6
4 20 8
5 26 6
6 30 4
7 32 2
8 32 0
9 30 -2
10 26 -4
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 QL

32
30
26 QL
Total product

20

12

L
0 1 2 3 4 5 6 7 8 9 10

Labor

FIGURE 5.1. Total product curve. The total product curve shows the behavior of total product vis-a-vis an input (e.g.,
labor) used in production assuming a certain technological level.

BBA 107 05/21/2024

MARGINAL PRODUCT
 The marginal product refers to the rate of
change in output as an input is changed by
one unit, holding all other inputs constant.
 Formula:

TPL
MPL 
L

BBA 107 05/21/2024

MARGINAL PRODUCT
 Observe that the marginal product
initially increases, reaches a maximum
level, and beyond this point, the marginal
product declines, reaches zero, and
subsequently becomes negative.
 The law of diminishing returns states
that "as the use of an input increases
(with other inputs fixed), a point will
eventually be reached at which the
resulting additions to output decrease"

BBA 107 05/21/2024

TOTAL AND MARGINAL
PRODUCT
35

30

25

20
TPL

15

10

5
MPL
0
0 1 2 3 4 5 6 7 8 9
-5

-10

BBA 107 05/21/2024

 LAW OF DIMINISHING
MARGINAL RETURNS
 As more and more of an input is added (given
a fixed amount of other inputs), total output
may increase; however, the additions to total
output will tend to diminish.
 Counter-intuitive proof: if the law of
diminishing returns does not hold, the
world’s supply of food can be produced in a
hectare of land.

BBA 107 05/21/2024

 AVERAGE PRODUCT (AP)
 Average product is a concept commonly
associated with efficiency.
 The average product measures the total
output per unit of input used.
 The "productivity" of an input is usually expressed in
terms of its average product.
 The greater the value of average product, the higher
the efficiency in physical terms.
 Formula: TPL
APL 
L
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TABLE 5.2. Average product of labor.
Total product of Average product of
Labor (L) labor (TPL) labor (APL)
0 0 0
1 2 2
2 6 3
3 12 4
4 20 5
5 26 5.2
6 30 5
7 32 4.5
8 32 4
9 30 3.3
10 26 2.6

BBA 107 05/21/2024

 The slope of the line from the
origin is a measure of the
AVERAGE
Y rise Y
Slope = 
run L

a b Y

Rise = Y

L1 L2 L
0 Run = L

BBA 107 05/21/2024

 The average product at b is highest.
Total AP at c is less than at a.
Product
Q AP at d is less than at c.

c
b
d
QL

0 L

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Q Highest Slope of Line
from Origin
Max APL

Inflection point
Max MPL TPL

0 L1 L2 L3 L

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 RELATIONSHIP BETWEEN
AVERAGE AND MARGINAL
CURVES: RULE OF THUMB
 When the marginal is less than the average,
the average decreases.
 When the marginal is equal to the average,
the average does not change (it is either at
maximum or minimum)
 When the marginal is greater than the
average, the average increases

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AP,MP

At Max AP,
MP=AP

Max MPL
Max APL

APL

0 L1 L2 L3 L
MPL

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 TP
TPL

0 L1 L2 L3 L
Stage I Stage II Stage III
MP>AP MP<AP
AP,MP AP increasing AP decreasing
MP<0
AP decreasing
MP still positive

APL

0 L1 L2 L3 L
MPL
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 THREE STAGES OF
PRODUCTION
Stage I
 APL is increasing so MP>AP.
 Allthe product curves are increasing
 Stage I stops where APL reaches its maximum at
point A.
 MP peaks and then declines at point C and
beyond, so the law of diminishing returns begins
to manifest at this stage

BBA 107 05/21/2024

 THREE STAGES OF PRODUCTION
Stage II
 starts where the APL of the input begins to
decline.
 QL still continues to increase, although at a
decreasing rate, and in fact reaches a maximum
 Marginal product is continuously declining and
reaches zero at point D, as additional labor
inputs are employed.

BBA 107 05/21/2024

 THREE STAGES OF PRODUCTION
Stage III starts where the MPL has turned
negative.
 allproduct curves are decreasing.
 total output starts falling even as the input is
increased

BBA 107 05/21/2024